Global market cross-currents, Fed in focus

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With the big event for the week – the outcome of the Federal Reserve’s Federal Open Market Committee – not due until Wednesday, global markets are left to focus on number of cross currents that are weighing on the stocks and oil and bolstering government bonds and the dollar.

The World Bank, which warned that the prospects for global economy continued to be “unusually uncertain,” downwardly revised its 2009 outlooks for Japan, the Euro Zone, and the United States. The organization expects global output to shrink by 2.9% this year , worse than an initial estimate of 1.7%.

Then there’s the reemergence of merger Monday madness. Over the weekend, Xstrata said it’s exploring a merger of equals with mining rival Anglo American, though talks are said to be preliminary.

Meanwhile, commodities are on their back foot with copper getting knocked down to a two-week low after data showed that China was chewing up the metal at a slower than expected rate. Oil also slipped back below $70 per barrel on a firmer dollar.

US Treasurys are up, with the 10-year benchmark rising 16/32 to yield 3.72% – a level that Ben Bernanke and other policymakers must feel relieved about as they prepare for the their two-day policy meeting that begins Tuesday. Two weeks ago, the yield made a run for 4%, but failed to breach the level that has become an important psychological line in the sand for investors.

The market is very much focused on what, if anything, the Fed says about its Treasury purchases. The bank has already commited to buy up $300 billion of US government securities as it attempts to keep interest rates low and the financial system stable. Some would like the Fed to commit to even larger purchases, while others would like to see some sign that policymakers are planning to eventually unwind the trillions of dollars they’ve pumped into the system.